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1 1 of 5 2/25/2013 4:45 PM Testimony on FY 1999 Appropriations for the Patent and Trademark Office STATEMENT OF GARY L. GRISWOLD PRESIDENT THE AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION BEFORE THE COMMERCE, JUSTICE, STATE, THE JUDICIARY, AND RELATED AGENCIES SUBCOMMITTEE APPROPRIATIONS COMMITTEE UNITED STATES HOUSE OF REPRESENTATIVES THE PRESIDENT'S FY 1999 APPROPRIATIONS REQUEST FOR THE UNITED STATES PATENT AND TRADEMARK OFFICE APRIL 1, 1998 Mr. Chairman: The American Intellectual Property Law Association (AIPLA) appreciates the opportunity to present its views on the FY 1999 Appropriations request of the United States Patent and Trademark Office (USPTO). The AIPLA is a national bar association whose nearly 10,000 members are primarily lawyers in private and corporate practice, in government service, and in the academic community. The AIPLA represents a wide and diverse spectrum of individuals, companies and institutions involved directly or indirectly in practice of patent, trademark, copyright, and unfair competition law, as well as other fields of law affecting intellectual property The AIPLA wants the United States Patent and Trademark Office to be the best patent and trademark office in the world. The prompt issuance of strong patents is critical to our Nation's inventors and companies. Early accurate indications regarding the registrability of trademarks and service marks is essential for the protection of American consumers and businesses. These goals can only be accomplished if the USPTO is adequately funded to hire, train, and properly equip the examiners needed to expeditiously process the applications filed each year. In addition, the Office must be properly managed so that problems can be identified early and corrective action taken promptly.

2 2 of 5 2/25/2013 4:45 PM The most critical problem facing the USPTO is inadequate funding. This problem has very different dimensions depending upon whether it is viewed through the eyes of the Appropriations Committee or through the eyes of the user community whose fees support the USPTO. First, let us look at the situation through the eyes of the Appropriations Committee. Prior to FY 1983, the USPTO was funded entirely from taxpayer funds paid into the general Treasury. Fees paid by applicants were deposited directly into the general Treasury and there was no correlation between the fees collected and funds appropriated to the USPTO. To address the declining financial situation of the USPTO in an era of increasingly tight budgets for federal agencies, the USPTO proposed a very significant fee increase in 1982 with the understanding that it would be able to keep and use all of the fee revenue collected. Thus, beginning in fiscal year 1983, the USPTO was funded through a combination of taxpayer revenues and user fees. A typical appropriation act read: For necessary expenses of the Patent and Trademark Office, including defense of suits instituted against the Commissioner of Patents and Trademarks, $xxx,xxx,xxx and, in addition, such fees as shall be collected pursuant to 15 USC 1113 and 35 USC 41 and 376, to remain available until expended. The first portion of this appropriation came from taxpayer funds from the general Treasury and the second portion came from fees paid by users, that is, patent and trademark applicants, patentees, trademark registrants, etc. It is important to emphasize that all of the user fees were classified as "offsetting collections" and were in their entirety made available to the USPTO to provide the products and services for which they were paid. This approach to funding the USPTO continued through the 80s, with the amount of funds coming from users gradually increasing relative to the amount of funds coming from general taxpayer revenues due to the phasing in of patent maintenance fees. Then, in 1990, the Bush Administration and the Congress, as part of a larger deficit reduction exercise, decided to stop funding any part of the USPTO with taxpayer revenues. The vehicle by which this was accomplished was the Omnibus Budget Reconciliation Act of 1990 (OBRA), Public Law Under this Act, the USPTO was instructed to impose a surcharge of 69% on all patent fees authorized by subsections (a) and (b) of Section 41 of Title 35, United States Code. In the first fiscal year following the adoption of OBRA, the surcharge fees raised a total of $99,307,000. An additional $3 million was appropriated to the USPTO from taxpayer revenue. The balance of the funding of the USPTO came from patent and trademark fees which, as before, were classified as offsetting collections and made totally available to the USPTO to use until expended. In the following years, FY , the USPTO was funded by a combination of revenues from the patent surcharge fund and the offsetting collections of user fees. The difficulty confronting the Appropriations Committees, however, was that the "602(b) allocation"

3 3 of 5 2/25/2013 4:45 PM provided to the Commerce, Justice, State Appropriations Subcommittee was not increased to reflect the revenues generated by the surcharge fee revenues. Not surprisingly, increasing demands on a shrinking 602(b) allocation soon led this Subcommittee to fund increasingly smaller portions of the operations of the USPTO, notwithstanding the fact that users were contributing to a surcharge fund which they understood to be for the purpose of replacing taxpayer revenues to fund the USPTO. From the perspective of the Committee, therefore, they were not diverting USPTO funds - they never received credit for the patent surcharge funds in the first place. From the standpoint of the users, however, a totally different perspective emerges. Users were forced to swallow a whopping 69% increase in patent fees in fiscal year While all of this money was allocated to the USPTO in FY 1991, increasingly smaller amounts were allocated to the USPTO in subsequent years. Through this fiscal year, a total of $234 million in fees paid by patent applicants will have not found their way to the USPTO for its use. (I recognize that in FY 1998, the President proposed diverting $92 million and the Congress agreed.) From the standpoint of the user community, this is a diversion of USPTO funds - a tax on innovation. Unlike the offsetting collections which, since fiscal year 1983, had been fully made available to the USPTO for its operations, the surcharge fund revenues were classified as offsetting receipts and treated the same as taxpayer revenue. The user community has thus been increasingly frustrated and upset by this withholding - or diversion - of their fees. This funding issue has also created significant operational problems for the USPTO and its users. One year ago, the President's budget proposed withholding $92 million from the $119 million which the Office was expected to deposit in the surcharge fund. In its FY 1998 Corporate Plan, the Office stated that it expected to receive $629 million in base fees, or offsetting collections, and $27 million from the surcharge fund. The USPTO stated that this level of funding would force it to: "Freeze the hiring of patent examiners. This will retain the current cadre of patent examiners, but will not fill any examiner slots that come open through normal attrition. The 4% expected growth in patent applications will be added to the applications awaiting examination on a first-in, first-out basis." The USPTO expected the number of patent disposals for FY 1998 to decrease from FY 1997 levels and the number of patent examiners to drop from 2,016 to 1,843. The USPTO estimated that the President's FY 1998 through FY 2002 budget proposals would result in pendency rising to 42 months by the end of FY The members of AIPLA were outraged at the prospects outlined by the USPTO for the health of the patent system. We protested as strongly as we could to our Congressional representatives. It may be that our pleas to stop what we view as a diversion of user fees has had some effect because it appears that Congress has decided to allow the provisions of OBRA creating the surcharge to sunset at the end of this fiscal year. However, it appears that the effect of the diversion was not as dire as the USPTO predicted for FY AIPLA discussed this issue with the USPTO and was informed that due to FTE relief and greater income than expected, the USPTO now plans to hire 650 additional examiners

4 4 of 5 2/25/2013 4:45 PM this fiscal year even with the $92 million diversion. Instead of a patent examining staff of 1,843 as projected in the FY 1998 USPTO Corporate Plan, the Office now projects a year-end staff of 2,561--a 39% increase over the FY 1998 Corporate Plan. It must be noted that the Office is seeking to improve and make transparent its forecasting techniques to produce more credible estimates. With this potential increase in the accuracy of budget forecasting, Congress should be aware that any further diversion will continue to erode the USPTO operations notwithstanding the mistakes made by the USPTO in budgeting for the current fiscal year. Unfortunately, a new strategy appears to have been adopted to prevent the USPTO from receiving all of its user fee revenues. As previously mentioned, in all Appropriations Acts from FY 1983 through FY 1997, the USPTO was allowed to collect and spend its patent and trademark fees, or offsetting collections, without any limit, with the exception of the amounts to be appropriated from the surcharge fund in the 1990s. Perhaps in contemplating that the surcharge would sunset, the Senate Appropriations Committee adopted a strategy of "capping" the amount of fees the USPTO could spend. While the House Appropriations Committee did not adopt such a cap in its Appropriations bill, the House ultimately agreed to the Senate proposal. The cap imposed on the USPTO for FY 1998 is $691 million. Of this amount, $664 million is to be derived from patent and trademark fees, or offsetting collections, and $27 million from the patent surcharge fund. Any offsetting collections in excess of $664 million are not available to the USPTO in FY The existence of this cap is taken advantage of in the President's FY 1999 budget proposal to carry over $66 million from FY 1998 to FY 1999 as part of an overall proposal to rescind $116 million. With the sunsetting of the authority to impose a surcharge, the patent fees will drop to the levels set by Congress in FY 1991 plus the cumulative CPI adjustments made since then. It is our understanding that this will result in the Office receiving $182 million less in revenues in FY To compensate for this, the Administration is proposing to adjust the statutory patent fees so as to keep them at their current level. If this fee adjustment is adopted, the USPTO estimates it will receive $836 million in patent and trademark fees in FY With the $66 million from FY 1998, the total funds the USPTO could have available in FY 1999 is $902 million. However, the President's budget, taking a page from the Senate Appropriations Committee, proposes a cap on the USPTO's ability to spend its fees in FY This is the first time the President has proposed a cap since the Office was permitted to directly spend its fees in The cap is $786 million. The difference, $116 million, is "to be returned to the Treasury for deficit reduction," a euphemism for using USPTO fees to fund other, unrelated government programs. Since $66 million of the $116 million comes from FY 1998, this means that $50 million of fees collected in FY 1999 will be diverted to fund other parts of the government. Stated in other words, the President is proposing to raise fees by $182 million in order to siphon off $50 million for other programs. This is clearly a $50 million tax on innovation. Last month, the AIPLA urged the House Judiciary Subcommittee on Courts and Intellectual Property not to enact a fee increase at the level the Administration is proposing. There is no acceptable justification to raise

5 5 of 5 2/25/2013 4:45 PM patent fees solely for the purpose of funding other government programs. We argued that any patent fee increase should be limited so as to raise no more than a total of $132 million, the amount of FY 1999 fee revenues that the President's budget proposes to allow the USPTO to use in FY 1999 to provide the products and services for which the fees will be paid. We are hopeful that the House Judiciary Committee will refuse to go along with the Administration's request to raise statutory patent fees by the full amount that would be required to offset the reduction in patent surcharge fee revenue that will occur as a result of the sunsetting of the surcharge authority. We note in this regard that the President's budget included a statement recognizing that "If the PTO legislative proposal to revise patent fees is not enacted into law, then the Administration will need to reduce the proposed rescission." Notwithstanding this statement by the Administration, the simple fact is that the matter of appropriating funds to the USPTO is exclusively the province of the Congress, and specifically the Appropriations Committee. Since none of the funds which the Administration has identified for rescission come from surcharge fee revenue, the AIPLA urges this Subcommittee to reject the proposal in the President's budget to rescind any USPTO user fees for deficit reduction. The fees in question, being offsetting collections, are not part of the Committee's 602(b) allocation. These are fees paid by applicants and users for products and services. Even if the products and services for which the fees were paid cannot be provided in either fiscal years 1998 or 1999, there is no reason to rescind or divert this fee revenue for other programs. If this fee revenue is needed to provide the products and services, it should be used for that purpose. If it is not needed for that purpose, the fees are too high and should be reduced. We in no way wish to suggest that this Subcommittee does not have a legitimate oversight function with respect to the USPTO. We believe that it is vitally important for this Subcommittee to challenge the USPTO and demand credible information and data on its operations to insure that the user fees are being properly spent. What we believe would be totally inappropriate, however, is for Congress to redirect these user fees to some unrelated program, depriving patent and trademark interests of the timely, high quality services for which they have paid. We appreciate the opportunity to comment on the USPTO appropriation and would like to work with the Subcommittee in any way we can to find a mutually satisfactory resolution of USPTO funding.